The Insider’s Guide to Real Estate / Pricing Concepts / Automated Valuation Models Can't Price Well

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AVM's sow widespread confusion for everyone

Blindly pricing homes without photos or tours is a fools errand

The financial consequences of mispricing a home can be disastrous if you are trying to maximize your net proceeds when selling. As you dig into this topic, there is only one thing to keep in mind about automated valuation methods (AVMs) like the Zestimate or Redfin Estimate: they are not accurate and should not be relied upon by either sellers or buyers.

Zillow acknowledges that their estimates are off by 5% or more half the time. One out of four times they are off by 10% or more, and 10% of the time, they are off by 20% or more. If pricing homes is like skydiving, trusting a Zestimate is like jumping out of a plane without a parachute, which makes only one outcome certain. Wrong numbers.

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AVM technology was developed by banks to analyze large numbers of homes and are accurate when used to value a portfolio of homes, such as for mortgage-backed securities. They work in those scenarios because their errors average out over large numbers of guesses. When AVM technology is applied to individual homes, the results are off-- did we mention they don’t even include photos in their algorithms? That means AVMs don’t know anything about the interior of the home or how it looks and no one buys homes that way. Whether an AVM under or over prices a home relates to the average level of finish for similar properties in the neighborhood and how the subject home’s level of finish compares to the average. In general, AVMs are more accurate in areas where homes are more similar.

The most important thing you should do as a home seller if you want to get the highest net proceeds is set an accurate or market clearing price when you list it in the MLS. Underpricing a home can eat up net proceeds as much or even more than the commissions, but understanding your actual home value is not a topic to be taken lightly if you want to hang on to your money when you sell.


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